Dollar drops on renewed Fed jitters

DeborahLevine

LisaTwaronite

NEW YORK (MarketWatch) — The U.S. dollar fell Thursday, coming back under pressure after a brief respite, as traders anticipate the Federal Reserve will announce plans next week to buy a massive amount of government bonds, a process that could weaken the greenback.

The dollar index
DXY, +0.14%
which measures the U.S. unit against a basket of six major currencies, fell to 77.255, off about 1.1% from 78.138 in late North American trading Wednesday.

Thursday’s decline against the yen started after the Bank of Japan’s made no changes to interest-rate policy, but moved forward the date of its next meeting to directly following the Fed’s upcoming gathering.

The dollar then fell further after the Labor Department said first-time filings for unemployment benefits in the latest week fell by 21,000 to 434,000, more than analysts expected. See more on jobless claims.

“Today’s better than expected labor data may stall that move [lower] temporarily but is unlikely to change market sentiment as traders continue to expect considerable amount of stimulus from the Fed next week,” said Boris Schlossberg, director of currency research at GFT.

Most of the currency’s market focus has been on expected central bank measures to stimulate the U.S. economy.

The policy-setting Federal Open Market Committee meets next week, concluding on Nov. 3. Investors and analysts expect the panel to announce a second round of quantitative easing — a process akin to printing money — intended to boost lending and spending so the economy grows more and can fend off deflation pressures.

The Federal Reserve Bank of New York, the central bank’s arm that conducts such operations, has asked primary bond dealers about the potential impact on yields of various amounts of QE, according to Bloomberg News.

Yields on benchmark 10-year Treasury notes declined, contributing to downside pressure on the dollar, currency strategists at Citigroup wrote in a note. Read about Treasury bonds.

There remains a “considerable degree of uneasiness in the market about the outcome from the FOMC meeting next week,” they said.

Since Sept. 20, the day before the last Fed meeting, the dollar index has dropped 5%, hitting its lowest level this year in the process.

The euro has gained 6.5% since then, reclaiming a 10-month high in mid-October. The dollar has declined 5.5% against the yen and touched a 15-year low at its worst level.

Bank of Japan

In Japan, the central bank left its key overnight call rate unchanged, in line with expectations that it wouldn’t take any new measures.

The Bank of Japan offered details of its asset-buying program and cut its growth outlook, and also moved forward its next policy meeting to Nov. 4-5 — right on the heels of the FOMC — from the previously scheduled Nov. 15-16. Read more on Bank of Japan meeting.

The yen rallied over “investors’ fears that if the FOMC announces a sizable plan next week it would put the Bank of Japan under pressure to expand its own quantitative measures,” said Andrew Wilkinson, senior market analyst at Interactive Brokers.

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